How to Scale Your Start-up

Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.

In a recent article, we told the story of Brightbox, a New York City--based start-up that provides secure phone-charging stations to public venues. It is piloting or plans to test Brightboxes in a range of venues (hotels, restaurants, bars, event spaces, gyms, malls, and movie theaters). These pilots are a great source of learning, because they are helping the team refine its view of the target consumer and the target venue.

Even as those pilots are under way, the Brightbox team is also laying the groundwork to quickly accelerate growth and scale the business should the idea take off.

Why (and When) to Go for Scale

Every start-up wants to achieve scale--building a multimillion-dollar business is an entrepreneur's dream.

But it is important to recognize that a lot of money can be wasted trying to scale a business that is not ready to grow. For every Facebook that successfully scales to one billion users, there are thousands that tried to get too big too quickly--and failed.

We like the following quote from Running Lean: "Ideas are cheap; acting on them is expensive."

A "running lean" start-up goes through three distinct phases:

1. Do I have a problem worth solving?

Must-Have: Is it something customers want?

Viable: Will they pay for it?

Feasible: Can it be solved?

2. Have I built something people want?

3. How do I accelerate growth?

So, a start-up should try to achieve scale only when it has first proven that there is a problem worth solving and it has built a solution people want. If you do not succeed at Phases 1 and 2, far better to abandon the start-up than to try to scale it; you will avoid a lot of wasted time and resources.

How to Achieve Scale

In most start-up businesses, capital is an ever-present constraint, and the focus must always be to squeeze maximum growth from limited capital.

A good way to think about capital and growth is in terms of payback time. Every capital investment is a negative cash flow, but if it is a good investment, it will create positive cash flows. The payback time is the amount of time it takes for the positive cash flows to fully pay back the original capital investment.

In our minds, reducing payback time is a critical enabler of start-up growth. With a fixed amount of capital investment, a start-up can roughly double its growth rate if it can halve its payback time. By accelerating paybacks, a start-up can reduce the number and size of capital investments it requires, allowing the entrepreneurs to retain more of the value created by the start-up.

This is the approach Brightbox is taking. Billy Gridley, Brightbox's CEO, and Steve Palladino, its executive vice president of sales and business development, told us that their device is not particularly costly to build and that payback time is less than a year. That is a great result, but our conversation quickly turned to ways to reduce payback time further in order to accelerate growth. We discussed a number of alternative payback accelerators, including:

Each of these scenarios has the potential to increase revenue and profits from each box, thus reducing the payback time.

Another option is to franchise, license, or white-label the concept. The Brightbox team is receiving a lot of interest from potential franchisees and licensors, both foreign and domestic. There are numerous advantages to creating these types of supplementary revenue streams (accelerated growth and ability to gain and hold market share, immediate revenue on device install). The team is considering those options but (correctly in our view) deferring until it has completed a more extensive set of pilots. Until it really understands in depth where and how to create value with this solution, it is premature to invite in partners; there is simply too much room for error in building a mutually valuable partnership.

Overall, the team seems to have a bright future. It has a product in the marketplace, it is learning a lot about its early customers, and it has a number of options open once it is ready to scale. We wish the team the best of luck and hope to see a Brightbox near us soon!